US Dollar Hits 5-Week Peak As Debt Ceiling Concerns Drive Treasury Yields Upwards

The U.S. dollar has risen to its highest level in more than five weeks, with the U.S. Dollar DXY index breaking above the 50-day moving average resistance level, indicating a revival in investors' demand for safe-haven assets while debt limit talks continue.

The dollar's gains during the past five trading sessions have outpaced other currencies, appreciating by 1.3% versus the euro, the pound, the yen, and the Swiss franc. 

The latest hawkish remarks from Fed members further bolstered the greenback this week, after clashing with current market interest rate forecasts and leading to some repricing in anticipation of a potential June rate increase.

Market-implied probabilities on another Fed hike in June have risen from a near-zero percentage a week ago to 27% on Wednesday, according to the CME Group Fedwatch tool.

The dollar is presently trading roughly 3% below its 2023 highs, which were reached on March 8, a day before the start of the regional banking crisis triggered by the failure of Silicon Valley Bank and Signature Bank. 

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Chart: DXY Index Breaks 50-Day Moving Average, Hitting Early April Highs 

Rising US Treasury Yields Boost Greenback Appetite

Debt ceiling discussions combined with hawkish comments from members of the Federal Reserve led to upward movements in the Treasury yield curve across all maturities.

The yield on the 10-year Treasury bond is once again above the 3.5% mark, while the yield on a two-year bond has broken the 4% psychological barrier.

The strengthening of the U.S. Dollar DXY index has been highly correlated with the rise of U.S. Treasury yields in the past week, as shown in the chart below.

Chart: Rising Treasury Yields Backed US Dollar Strength

Exchange Traded Funds Tracking the US Dollar Performance

There are two major ETFs that provide investors with exposure to the performance of the U.S. dollar.

• The Invesco DB USD Index Bullish Fund ETF UUP closely tracks the U.S. Dollar DXY index, which measures the strength of the USD against a basket of six major currencies.
• The WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU closely tracks the Bloomberg dollar index, which is a broader gauge of the U.S. dollar's strength against a trade-weighted basket of world currencies. 

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